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Ten years ago today marked a milestone in financial deregulation as the US Government repealed legislation separating commercial and investment banking. Here, Financial News rounds up reaction to the abolition of the Glass-Steagall Act – including the differing opinions of senior executives, old and new, at one of the country’s biggest banks.

The Glass-Steagall Act of 1933 was put in place after the Great Depression to strictly separate commercial and investment banking activities. However, on November 12, 1999, the then US president Bill Clinton signed a new law, the Gramm-Leach-Bliley Act, that did away with Glass-Steagall.

The banking industry had been seeking the abolition of Glass-Steagall since the 1980s and in 1987 the Congressional Research Service prepared a report exploring the pros and cons of preserving the act, which can be viewed at: http://bit.ly/4iG69W.

There are now differing opinions on whether the repeal of the act contributed to the latest financial crisis. Below are examples of these mixed views from around the web.

“Reed, who helped engineer the merger that created Citigroup, apologised for his role in building a company that has taken $45bn (€30bn) in direct US and said banks that big should be divided into separate parts. Citigroup was formed in 1998 when Citicorp, a commercial bank, combined with Sanford Weill’s Travelers, which owned the investment firm Salomon Smith Barney.

“’I would compartmentalise the industry for the same reason you compartmentalise ships,’ Reed said in the interview in his office on Park Avenue in New York. “If you have a leak, the leak doesn’t spread and sink the whole vessel. So generally speaking you’d have consumer banking separate from trading bonds and equity.’ “

“Pandit told a group of Washington University students on Monday that securities underwriting wasn’t the problem in the recent financial crisis, Proprietary trading was the dangerous activity this time around.

He said: “It makes sense to me to say you don’t take deposits as an institution and turn around and run a hedge fund. That’s the new form of Glass-Steagall to me. … If the business plan is around client facilitation, a client-centered strategy, firms can be in those (securities) businesses and the regulators can agree to let it run. Underwriting is not the thing that took this market down. It was a lot of highly leveraged balance sheets, a lot of assets on the books that were non-core assets.”

Volcker, the former Federal Reserve chairman and head of the President’s Obama’s Economic Recovery Advisory Board favours breaking up big banks with a modern version of Glass Steagall.

“In the Volcker resurrection, commercial banks would take deposits, manage the nation’s payments system, make standard loans and even trade securities for their customers — just not for themselves. The government, in return, would rescue banks that fail.
On the other side of the wall, investment houses would be free to buy and sell securities for their own accounts, borrowing to leverage these trades and thus multiplying the profits, and the risks.

"Being separated from banks, the investment houses would no longer have access to federally insured deposits to finance this trading. If one failed, the government would supervise an orderly liquidation. None would be too big to fail — a designation that could arise for a handful of institutions under the administration’s proposal.”

“In other industries we separate those functions that are utility in nature – and are regulated – from those that can safely be left to the discipline of the market. There are those who claim that such proposals are impractical. It is hard to see why.
Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are.”

“Given the globalisation of the financial markets, it would be foolhardy to prohibit US banks from engaging in securities activities that are performed by their global competitors.

"In short, reinstating the Glass-Steagall Act would not prevent another financial crisis. It would just increase the severity of any such crisis by limiting the options for helping securities firms in liquidity crunches. Moreover, imposing restrictions on the securities activities of US banks would put them at a tremendous disadvantage relative to their foreign competitors.”